Real Money's Carleton English and James Passeri will be keeping readers up to date with the latest news from Wednesday's annual Sohn Investment Conference, with the market outlook of some of Wall Street's most influential investors.
Highlights from the morning's "Next Wave" segment included a presentation by David Rosen, a former investor with SAC Capital, on his firm's long position in Kraton Performance Polymers (KRA). Nick Danaher, founder of Domando Capital, and Precocity Capital's Nick Tiller presented their bull takes on TripAdvisor (TRIP) and Royal Dutch Shell (RDS.A), respectively. Meanwhile, Genevieve Kahr of Ailanthus Capital Management went short on inflight Internet provider Gogo (GOGO), citing mounting competitive headwinds, and characterizing the company as "a minnow swimming with sharks."
The first session of the Sohn Conference was highlighted by a dismal outlook on Bank of the Ozarks (OZRK) by Muddy Waters' Carson Block, which quickly sent shares into a tailspin after Block argued the company could not sustain its earnings growth, primarily on the inherent risk in construction lending.
Larry Robbins of Glenview Capital Management advised investors to "get a grip" of fundamentals as markets increasingly appear unpredictable.
The session closed with venture capitalist Chamath Palihapitiya presenting a bull case for Amazon (AMZN), arguing the company has a monopolistic position on the roiling Silicon Valley market with Jeff Bezos' proprietary cloud technology.
The next session will include Starboard Value CEO Jeffrey Smith, VR Capital's Richard Deitz, Duquesne Family Office's Stanley Druckenmiller, and DoubleLine Capital CEO Jeffrey Gundlach.
The final round of speakers kicks off at 4 p.m. and includes PointState Capital's Zachary Schreiber, Commonwealth Capital's Adam Fisher, and David Einhorn, founder and president of Greenlight Capital. And the day will wrap up with a presentation by Kynikos Associates' James Chanos.
The Sohn Conference is often a hub of market-moving intelligence, such as last year's presentation by David Einhorn, in which his bearish take on the fracking industry helped send shares of Pioneer Natural Resources (PXD) into a 4% slide on the day.
1:55 p.m. ET
- Smith: It's Time to Buy Depomed and WestRock
Jeffrey Smith, CEO of activist hedge fund Starboard Value, emphasized his firm's bullish stake in two companies at the 2016 Sohn Investment Conference Wednesday: Depomed (DEPO) and WestRock (WRK). (For the full story, click here.)
2:35 p.m. ET
- Druckenmiller: The Fed Has 'No Endgame'
Stanley Druckenmiller, CEO of Duquesne Family Office, argues that U.S. central bankers have been "stumbling" in a shortsighted course of maintaining low interest rates.
"If we have borrowed more from our future in any time in history, we should be selling at a discount, not at a premium of valuations," Druckenmiller says, adding that the country's "myopic policymakers have no endgame."
(For the full story, click here.)
2:50 p.m. ET
- Dietz: Clear Path Ahead for Greek Banks and Bonds
Richard Deitz's presentation was both surprising and not at all surprising when you consider what his fund, VR Capital Group, does.
When a fund says it focuses on distressed debt in emerging markets, the options will likely not be desirable to your average retail investor. With that in mind, Deitz presents a long case of Greek banks and Greek government bonds. He didn't shy away from his choice being controversial.
"In short, Greece seems to be to financial risk what Steph Curry is to the three point shot," Deitz says.
Before Dietz delved into the details, he gave a brief history lesson. Few will remember when Greece's real GDP grew at 7% in the years between 1999 and 2008, as cheap money flew into the country. Unfortunately, we all remember what happened next. The party stopped at the end of 2008 and into 2009, and Greece was severely affected. Greece received a bailout from the International Monetary Fund in 2010, another one in 2012, and it received a third in 2015. (The third bailout occurred after former Greek Finance Minister Yanis Varoufakis, an "erratic Marxist," played a high stakes game of poker against his German counterpart, Wolfgang Schäuble, and the German called his bluff, Deitz says.)
As for the upside to Greek banks, Deitz says the third bailout provided VR Capital's entry point. Provisions of the bailout program consisted of conservative assumptions layered on top of each other to create a good margin of safety, Deitz says. He notes that the banks are better capitalized today and are reducing their operating costs through consolidation and other right-sizing measures. The path and timing of Greek banks and Greek debt meting Deitz's projections may be uncertain, but Deitz believes the path is clear.
3:30 p.m. ET
- Gundlach: The Awful Art of Negative Interest Rates; Pondering a Trump Presidency
Jeffrey Gundlach, founder of DoubleLine Capital, opens by comparing negative interest rates to the works of Bridget Riley, whose art has a disorienting effect, similar to seasickness, which he says makes one wonder why anyone would gaze upon it. He attacks negative interest rates and the $7.8 trillion in negative-yielding bonds outstanding, which has turned central bankers into Bridget Rileys, Gundlach says.
The hedge fund manager's main investment idea is shorting the utilities index while going long mortgage REITs, as the former has a higher price-to-earnings yield than the latter. Also, the dividend yield on REITs is more advantageous, according to Gundlach's analysis. He also refuted the common belief that utilities are a safe bet by sharing a chart that tracked volatile returns over the last roughly 20 years.
Finally, Gundlach got to the heart of an issue weighing on Americans' minds following the Indiana primary: the increasing likelihood of a Trump presidency. The Republican candidate has not shown restraint in attacking opponents, and Democratic candidate Hillary Clinton provides a bottomless well of material for Trump, he says. If there is one bright side to a Trump presidency, Trump has proven in his business dealings that he is not adverse to debt and many of his presidential policies will surely involve debt, Gundlach says.
(For the full story, click here.)
4:34 p.m. ET
- Schreiber: Trouble Brewing in the Oil Market
PointState Capital CEO Zachary Schreiber has a dire economic outlook for China and Russia, and it could spell trouble for the oil market.
While PointState is bullish on oil in the short term, Schreiber says he is bearish over the long term, largely because of macroeconomic woes in China and Saudi Arabia. China, a major global oil buyer, will eventually need to de-lever its financial system because of "exploding debt" and "imploding return on capital," Schreiber says.
Meanwhile, oil-producing giant Saudi Arabia is burning through about $80 billion to $100 billion in foreign-exchange reserves to cope with low oil prices, which have been bobbing around $40 a barrel, says Schreiber. He says that at $50 a barrel over the long term for crude oil, Saudi Arabia will be running a roughly $90 billion annual fiscal deficit, giving the country only about two to three years before it "hits a wall."
Deep problems within the oil nation are further evidenced in talk of an initial public offering of 5% of its nation-run oil giant Saudi Aramco, which Schreiber calls its "golden goose."
"The region is a mess," Schreiber adds, noting it will not be able to trim its defense budget, and the strength of the Saudi Arabia Monetary Agency's balance sheet has been significantly overvalued.
4:48 p.m. ET
- Sohn 2016 Winning Contest Idea: Short DexCom
This year's Sohn Investment Idea contest winner is Mark Grow, a first-year student at Columbia Business School. A five-person panel of judges, which included Bill Ackman and David Einhorn, evaluated his idea: shorting DexCom (DXCM).
DexCom is a medical-device company that makes insulin pumps. The stock currently trades around $60 a share and Grow says he believes it could fall to $20. The rational for the short is that Medtronic (MDT) and Abbot Laboratories (ABT) both have devices coming on the market soon that could take Deco's market share. From this, as well as other headwinds, Grow sees annual revenue per user from current DexCom customers falling by 30%.
Not only does DexCom face lost market share from competitors, Grow also says that only 35% of Type 1 diabetes patients use insulin pumps, despite the technology being available for decades. This means, in Grow's view, that lost market share is unlikely to be made up elsewhere. Over the last year, shares of the company fell 7% and fell as much as 5% in after-hours trading Wednesday.
4:51 p.m. ET
- Fisher: Bet on Japan's Low Rates
Adam Fisher, founder and chief investment officer of Commonwealth Opportunity Capital, is centering his talk on the rationale behind betting on low Japanese interest rates. He supports his case based on the theory that the public sector must borrow more to stave off economic declines.
"The world does not work without debt growth," he says, comparing parallels in historical global GDP growth with increases in national debt loads. "Without the private sector, we need the public sector to borrow," he says, noting the advent of negative interest rates means only the public sector is capable of borrowing at meaningful levels.
He points to Japan's particular failure to increase private-sector debt, despite near-zero rates, extrapolating that only the Japanese public sector will be able to raise GDP through borrowing.
"Japan has suffered lately from inability to grow debt," he says, and there's "virtually a 100% probability" that rates will not increase in Japan.
5:15 p.m. ET
- Ariely: A Matter of Trust
In an industry in which the integrity of its participants is often questioned, it is interesting -- and perhaps ironic -- that one of the final speakers at the Sohn Investment Conference would focus on trust. Dan Ariely, behavioral economist and author of Predictably Irrational, spoke about the importance of trust in societies. Trust is a public good, Ariely says, and when we trust each other, everyone is better off, and when one person doesn't trust, the system begins to collapse.
As evidence of this Ariely presented several game theory examples, including the popular prisoners' dilemma, in which the best-case scenario for the prisoners is not ratting each other out. Ariely found that if the "same" prisoners play the game repeatedly, they are less likely to rat each other out because they trust other. In another example, Ariely spoke of a theoretical town in which citizens were given $10 a day and whatever they put in a collective pot would grow fivefold that day and be distributed equally among citizens, regardless of whether or not they contributed to the pot. Naturally, one day, one person doesn't contribute but still reaps rewards. The next day, no one contributes to the pot and the system collapses.
While it was not expected that Ariely would present an investment idea, one might wonder if he was speaking of investor short-termism and denouncing aspects of capitalism.
5:18 p.m. ET
- Einhorn Squashes Caterpillar
David Einhorn, founder and president of Greenlight Capital, returned to Sohn to make his case against Caterpillar (CAT). Einhorn says the two big drivers of Caterpillar's mining business, coal and iron ore, are unlikely to rebound in the short or medium run.
Last year, Einhorn appeared at Sohn to make a case against Pioneer Natural Resources (PXD), citing a "nearly infinite supply of negative return opportunities," sending the stock lower on the day.
(For the full story, click here.)
5:46 p.m. ET
- Chanos: China Slowdown Reaches Africa
Longtime China-bear Jim Chanos sees more areas that will be negatively affected by a slowdown in China: South Africa and Nigeria. Both countries have commodity-driven economies, which were for some time buoyed by Chinese investment.
As a specific short idea, Chanos presents MTN Group, as the South African telecom company derives 62% of its revenue from South Africa and Nigeria.
(For the full story, click here.)
- That concludes Real Money's live coverage of Sohn 2016. See you next year!
